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August Aquila
How to build a better partner compensation plan

Cook up a winning recipe with 9 key ingredients.

October 14, 2014
by August J. Aquila, Ph.D.

Partner compensation plans have evolved significantly from the formula days of the finder, minder, and grinder. Today, more emphasis is placed on tying compensation to the firm’s strategic plan. Today’s compensation plans not only allocate compensation based on an individual partner’s revenue contribution but also reward those partners who help the firm enhance its ability to serve clients, achieve its strategic goals, and build capacity for the future.

The challenge in designing the right system is ensuring it motivates the partners to deliver the initiatives the firm needs to be successful. Compensation should motivate and reward productive behavior and outcomes—and discourage nonproductive behavior and outcomes. 

How well does your firm’s compensation plan work? Here is a list of nine design elements found in today’s better plans:

1. Base pay represents 75% or less of total compensation. Many firms used to pay out almost all of their earnings to partners throughout the year. This left very little or nothing for performance rewards. Today, many firms have reduced the amount of base pay to 75% or less of total compensation.

The trend today is to keep base pay relatively flat from year to year with increases based on a consumer price index or change in a partner’s responsibility. Firms also should incorporate into their partnership or compensation agreement the ability to adjust downward a partner’s base compensation depending on the partner’s long-term (three years) or short-term performance. These annual reductions can range from 10% to 20% in any one year.

2. Performance bonuses are a meaningful portion of partner compensation. Firms should reward partner achievement with performance bonuses of 25% or more. For example, if Partner A has a base salary of $200,000 and achieves specific goals for the year, he or she should be able to earn a potential bonus of up to $50,000. Because base pay remains fairly flat from year to year, the performance bonus continues to increase until the firm reaches its desired percentage. Firms often take two or three years to bring bonuses to the desired percentage as the change needs to be evolutionary rather than revolutionary.

3. Performance bonuses reward both behavior and outcomes. Behavior shows how the partner lives the firm’s core values—for example, he or she follows the firm’s billing and collections policies, attends firm functions, and/or participates in community events. Good character by itself is not enough. Partners need to demonstrate a wide array of results, for example, developing new skills, bringing in new clients, or performing work profitability. Behaviors and outcome measures are part of the goal-setting process. The firm’s most valuable partners exhibit the best behavior and produce the best outcomes.

4. Performance bonuses incorporate independent and interdependent goals. Too many compensation plans pit partner against partner because all the goals are independent. The prime example is the “eat what you kill” compensation system. A good plan has independent and interdependent goals. When firms reward both, partners realize they can accomplish more by working together.

5. Performance bonuses focus on current—and future—production.Production goals usually outweigh other types of goals. From a weighting percentage, usually 75% of the bonus is tied to production/business development and 25% to future production. Examples of production goals include net income per partner, profitability per employee, and reduction in days outstanding. Firms also need to focus on building capacity for future production, such as developing new services, training future leaders and employees, etc. Think of these goals as R&D work. They won’t pay off today, but in the future.

6. Partners are evaluated based on customized goals. Partners are not created equal. Each one brings unique talents to the team. As such, don’t expect each partner to have the same goals. Instead, management should explore with each partner how he or she can best help the firm achieve its goals and vision. Partners and their supervisor (either the managing partner or, in larger firms, the head of their line of business) should agree at the beginning of the year to a set of goals with clearly defined measures and targets. These goals also should be tied to the firm’s strategic goals. For example, let’s say a firm sets a goal to develop new service areas. The consulting group decides that business valuation is an area with potential. Partner B in the consulting group wants to develop this service and agrees to have some of his performance bonus tied to developing the business valuation area.

7. Partners receive proper performance management feedback. Partners need to understand why they are being rewarded the way they are. For example, Partner C is talented at bringing in new business, and the client base she manages has become too large. A goal is set for Partner C to transfer 25% of her business to another partner. This provides the other partner with more work and allows Partner C to bring in even more business. Successful transfer of the business by Partner C would earn performance bonus money.

8. Discretionary allocation is included. Any good compensation system should have a discretionary/subjective element to it. Most partners do not earn 100% of their performance bonus, so the discretionary part of the plan is funded with the dollars that were not distributed in the performance bonus element. The managing partner—or, in larger firms, the compensation committee—can then decide to award those discretionary funds to the firm’s top achievers.

9. Plan ensures fairness. Countless partners have pulled me aside to talk about the lack of fairness they perceive in their current compensation systems. While some of this complaining may be “sour grapes,” many systems are not designed to be fair, and partners often have legitimate complaints. For example, a firm may distribute too much of its profits on an equity basis, rather than a performance basis.

Final thoughts

Everyone knows there is no perfect compensation plan, but the more a firm can incorporate the above nine design elements into its compensation plan, the more it will create a culture of engagement, accountability, and higher performance. When that happens, partners will stay more focused on serving clients, developing staff, and being rewarded for the fruits of their labors.

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August Aquila, Ph.D., is the founder of AQUILA Global Advisors LLC, a firm that specializes in compensation plan design, mergers and acquisitions, succession planning, and partnership issues. Learn more about AQUILA Global Advisors and its services at www.AQUILAAdvisors.com. Aquila is also co-author of Performance Is Everything: The Why, What, and How of Designing Compensation Plans, published by the AICPA.